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The Economist magazine, echoing a theme of mine that has permeated several posts (the evolutionary ecology of human social institutions and technologies ) discussed two unconventional examples of managerial efficiency: Somali pirates (http://www.economist.com/whichmba/somali-pirates) and the North Korean government (http://www.economist.com/blogs/schumpeter/2010/10/succession_planning). Somali pirates provide a purely predatory and parasitic example of how smaller start-ups can break into markets dominated by established behemoths, and North Korea provides an example of successful succession planning (as important in corporations as in governments). While the details of the comparisons are interesting (read the articles), what is most interesting to me is the issue of the balance between productivity and predation that these and other successful strategies are used in service to.

We tend to see the world in absolutes, dividing it into production and predation according to our location and ideological predisposition. Anti-corporatists (mostly on the left) view corporations, and anti-imperialists view powerful nations, as entirely predatory, while those who benefit either directly or indirectly from their activities, and are aware of it, see them as primarily productive. But there are objective measures by which we can untangle the two, such as contribution to global GDP, or to other forms of utility production, versus contributions to global utility reduction. Some enterprises are clearly purely redistributive (such as piracy), producing no new wealth at all, and in fact reducing its production by throwing gravel in the gears of the productive engines of the economy (i.e., increasing transaction costs). This is true even though they are siphoning some of that wealth produced elsewhere to grateful populations, complete with forward and backward linkages from which other enterprising souls might benefit (e.g., outfitting the pirates with equipment, benefiting from their increased spending of their loot, even generating business for security services to defend against them).

The strict Libertarian philosophy places minimal constraints on these processes, differentiating little between production and predation, as long as it occurs within a context of legally defined and protected private property rights. But even within that legal context, there are opportunities for predation constantly arising, such as those that led to the Enron-engineered California energy crisis of 2000-2001 or the 2008 financial sector meltdown. There are many more innocuous activities in the market economy which do not produce wealth, but rather only siphon it off, such as high-volume, high-velocity, extremely short-term stock trading using computer algorithms, or shady personal injury legal services (not to imply that all personal injury legal services are shady) that rely on massive advertising, high volume business with rapid turnover, and quick settlements that may not reflect the clients’ best interests or even outcomes superior than could have been achieved without the lawyers’ assistance. These are perfectly legal forms of what are largely predatory practices.

Economist Mancur Olsen wrote a book titled “The Rise and Decline of Nations” in the 1970’s or 80’s about how nations become wealthy by developing production-oriented economies, and then are weakened by an increasing over-emphasis on distributional struggles, which divert an increasing proportion of people’s time and effort from productive activities. Of course, a nation doesn’t have to be wealthy for too many people to be investing too much in distributional struggles (a common trap of many underdeveloped nations). The point is that what proportion of human effort-hours is invested in productive activity v. redistributive activity is relevant to how much wealth and utility is being produced.

There is nothing wrong with attention paid to distributive implications of policies, as long as that attention is paid in conjunction with attention paid to the balance of productive and redistributive efforts. Given a choice between two equally productive economic models, the one that produces greater distributional equity is preferable.  Nor is it wrong for a large market economy to invest some of its resources in consideration of how to divert wealth in economically and socially productive ways. Distributional struggles exist with or without the intentional intervention of government, and government subsidies are often captured by those least in need of distributional assistance. Both government and the public which overseas it has an inescapable challenge in monitoring distributional choices to ensure that they are both efficient and fair.

Indeed, many public investments that are perceived to be primarily redistributive, or predatory against tax-payers on behalf of “special interests,” are in fact primarily productive, addressing social problems, infrastructural maintenance demands, and human capital development demands in ways which increase aggregate utility (both directly, and indirectly through decreased transaction costs) as well as lead to a more equitable distribution of it. But increasing diversion of resources to battles over how to divide the pie ends up shrinking the pie that is divided, and those enterprises (like Somali pirates) that not only divert resources to distributional struggles, but do so through violent predation, decrease the size of the pie even more.

One of our collective challenges as we continue to refine our social institutional landscape is to create regulatory regimes that increase the amount of productive praxis, and decrease the amount of non-productive predation, in both our market and non-market activities. Just as ecosystems can be ravaged by locusts, or overly extractive human beings, so to human economic systems can be ravaged by those actors that swoop in and ravenously extract wealth without producing any. The fact that it can be accomplished in the context of well-defined and well-enforced private property rights is just one more argument why a regime of well-defined and well-enforced private property rights, and no more, is not the ultimate culmination of political economic development. Private property rights are just one thread in a more complex tapestry, a tapestry which we are continuing to learn to weave.

Libertarians rely on the assumption that government is predatory, and that private corporations aren’t, but, in reality, either or both can be, and our challenge is to prevent either and both from being so. Crippling the one that is organized to serve the public interest (and is designed, with limited success, to be answerable to the populace as a whole), in order to leave the field clear for the one that is organized to serve only private interests (and is organized comparatively efficiently to do so) is not a recipe for reducing predation. Rather, it is a recipe for increasing it, and reducing only our means for reining it in.

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  • Steve, this is a great topic! I don’t know if you remember what I do for work, but I assist Colorado home owners with mortgage loan modfications, mainly Making Home Affordable modifications. Before all the Rebulicans start yelling about “they deserve it for buying homes they couldn’t afford”, let me tell you that my clients are mainly union employees who were fuloughed from full time to part time up to 18 years of seniority. These are people that never missed a mortgage payment in their lives but now find themselves in a situation NOT of their own making.

    On a very small scale I deal with what you are talking about. The Modification programs that have instituted by President Bush and President Obama are designed to help people afford their lives, not just their homes. By basing a home payment on 31% of gross income it leaves money available for people to spend.

    The formula for modifications is basically simple and the process of receiving assistance should also be simple. The programs are designed that way, but they are not even close to being administered that way. People spend months, moving into years, trying to get the help they need while banks continue to negligently NOT provide the assistance they agreed to when they signed Servicer Participation Agreements with the US Government. Every single servicer/lender is in breach of contract and I spend all day, every day, fighting for my clients with these programs.

    Big Banks vs Disposable Income…. its a ridiculous situation that is harming families nationwide AND hurting the economy by creating a situation where people have no money to spend outside of their home loan. Fannie Mae and Freddie Mac were made Agents of the United States Government to oversee record keeping and compliance with the HAMP program yet the banks remain completely out of compliance with the guidelines set forth in the agreements they signed. I fight every day for the Servicers/Lenders to be sanctioned by Freddie Mac for failure to comply with the contacts they signed.

    If you read my letter to the President you already know most of this. Although I have identified the problem, as you have in your post, where do we start with a solution? I make as much noise as I can to bring attention to my issue, and my clients still suffer. If I could help my clients, they could help the economy. If my clients had the money they might buy what the small business owner is trying to sell…but someone needs to start fixing from the bottom up. Don’t worry so much about your tax structure small business because without customers, you have NO business.

  • Thanks, Kathryn, for providing a human face for the abstractions of my post.

    There are (at least) two different but equally relevent answers to your question, “where do we start with a solution?” The first answer is the ideal: We start by dumping the ideological rhetoric, and laying all of the values, challenges, problems, information, and analyses we have at our disposal on the table, and work with it to get the job done. The metaphor I use (that I stole from someone, though I can’t remember who) is that of the NASA engineers dealing with the Apollo 13 crisis (as depicted in the movie): They spilled everything they had on hand onto a table, and set about problem solving. There was no obfuscating rhetoric about whether it was or wasnt’ what the Founding Fathers would have wanted, or whether it did or did not serve some particular and dubious definition of individual liberty (I suppose we should have just left those astronauts to fend for themselves, because, you know, they just weren’t working hard enough…). It was a nuts-and-bolts, feet-on-the-ground, eyes-on-the-prize orientation. And that’s what we need more of.

    Some people dismiss it as “intellectual elitism” or “technocracy,” but I call it sanity. As I’ve often stated, it still leaves in place the “agency problem,” that of making sure that those we are delegating resonsibility to are acting responsibly. But agency problems are a normal part of life, and not one to be avoided (we have agency problems with surgeons as well, but I wouldn’t recommend avoiding surgery to avoid the agency problem).

    The other answer is the political one, the one that deals with the fact that there are human, ideological obstructions to the practical one that keep us from getting to it in one step. I have no easy answer for the political question, except to keep doing what we’re doing, and to keep doing it with ever more determination, wisdom, compassion, and, well, determination again. It’s a hard slog, but we have to keep at it.

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